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2 LEADERS ARE OUT AT HEALTH GIANT AS INQUIRY GOES ON

The executive who became the most visible symbol of profit-driven medical care stepped down yesterday as the top officer of the Columbia/HCA Healthcare Corporation, amid a criminal investigation of whether the company's pursuit of profits has stretched beyond the legal limits.

Richard L. Scott, once celebrated as a visionary reformer of the hospital industry but more recently criticized for his aggressive tactics, resigned under pressure as chairman and chief executive, as did his top lieutenant, David Vandewater.

In the first hours after Mr. Scott's departure Columbia began to undo some of his legacies. For example, it has vowed to be more cooperative with Federal authorities in their investigation, and to halt its widely criticized practice of selling doctors stakes in Columbia hospitals.

In less than a decade, Mr. Scott had built a company he founded with two small hospitals in El Paso into the world's largest health care company -- a $20 billion giant with about 350 hospitals, 550 home health care offices and scores of other medical businesses in 38 states.

The company held itself out as a model for the increasingly cost-conscious world of health care, applying the competitive practices of corporate America to an industry still dominated by not-for-profit institutions. As Mr. Scott acquired hospital companies far bigger than his own, his reputation grew to the point that last year he was named on Time magazine's list of the 25 most-influential people in the country.

But the style that helped the 44-year-old Mr. Scott build Columbia eventually played a role in his undoing. Officials at a number of Federal agencies began investigating whether Columbia hospitals engaged in practices such as fraudulently overstating their expenses to increase their compensation from Medicare, and regularly conducting unnecessary blood tests.

Last week, law enforcement agents raided Columbia offices and hospitals in seven states, seizing documents related to business practices. That was the final straw for the company's board of directors, and led to Mr. Scott's resignation, people close to the company said.

Mr. Scott, a lawyer who had no experience in managing hospitals before founding Columbia, will be replaced by Dr. Thomas F. Frist Jr., a surgeon by training, who has made his career in the hospital business. Now Columbia's vice chairman, he and his father had founded the Hospital Corporation of America, the granddaddy of the for-profit hospital corporations, before Columbia acquired it in 1994.

People close to Mr. Scott characterized his downfall in terms suitable for a Greek tragedy, portraying him as a brilliant and incisive businessman who was undone by his fatal flaws. Those flaws, they said, included an arrogance and aggressiveness that permeated the company. Indeed, in interviews yesterday, Dr. Frist, who has agreed to work without pay, went to great lengths to emphasize that the Columbia of old was dead, and what was emerging was a gentler company that intended to be less combative with the Government, competitors, its employees and the press.

Mr. Scott and Mr. Vandewater ''were the right people at the right time,'' Dr. Frist said. ''But it is time for a different style to take us to the next level, to deal with whatever issues are out there.''

''I have to send a very strong message to Washington that the new C.E.O. of this company is very serious about addressing the Government's concerns, and understands the gravity of the situation,'' Dr. Frist said. ''This has got to be on the top of the priority list.''

Already, Dr. Frist has made several changes with the intent of sending that message. He has hired a prominent law firm, Latham & Watkins, to represent the company and look at the way it does business. A second law firm was hired by a committee of the board to conduct an independent investigation of the accusations against the company.

But most important, Dr. Frist said he was ending Columbia's practice of selling ownership stakes in its hospitals to its doctors. That has been a critical piece of the strategy that helped propel Columbia's growth, but led to great legal and ethical criticism that the company was compromising the medical independence of its doctors. ''This is one that is a no-brainer,'' Dr. Frist said of the doctor partnerships in hospitals. ''They're gone.'' He said that the company would stop selling the hospital partnerships, and over the coming months would unwind those that had already been sold.

As Dr. Frist works to get his arms around the company, people close to Columbia said that some business deals have been put on hold. For example, recent merger negotiations with the Tenet Healthcare Corporation, the nation's second-largest hospital corporation, has been temporarily put on a back burner.

Government officials said yesterday that changes at the top of a major corporation should have an effect on the way investigators dealt with the company. ''The fact that you see a number of search warrants executed here would tend to suggest that law enforcement did not trust top management,'' said one official not directly involved in the case. ''A change like this would make a substantial difference.''

But that does not mean the investigation would come to an end, analysts said. ''Clearly, the magnitude of the investigation has precipitated these events,'' said Peter Young, a health care analyst who has advised some of Columbia's not for profit competitors. ''However, one should expect the investigation to continue.''

In a statement yesterday, the company said that both Mr. Scott and Mr. Vandewater maintained that ''throughout their tenure, they have acted honorably and in the best interests of the company.''

Mr. Scott portrayed his and Mr. Vandewater's decisions to resign as a sacrifice made in the best interests of the company. ''Though the decision to resign was a difficult one,'' he said in a statement yesterday, ''we consider it to be the ultimate demonstration of our commitment to Columbia's mission.''

The resignation of Mr. Scott was the culmination of months of dismay and discussion within the company's board, people close to the company said. And in the end, Dr. Frist said, the key participant in the events that ended with Mr. Scott's resignation was a person who also played a role in the start of the company: Darla Moore, the head of Rainwater Inc. and the wife of Richard Rainwater, the Texas billionaire whose initial decision to invest with Mr. Scott in 1987 gave Columbia its start. Ms. Moore, a friend of Mr. Scott, was said to have helped coordinate directors so that they could make a decision, and then helped to persuade the former chief executive that his resignation was the only logical step.

Members of the board had become distressed with Mr. Scott's management style. In particular, Mr. Scott would seek advice only from those people who agreed with him, said people close to the company. Anyone who disagreed with his approach was tossed aside as an impediment to his brand of change.

One person cut out by Mr. Scott was Dr. Frist himself. After selling HCA to Columbia, Dr. Frist began hearing criticism of Columbia's business practices from people with whom he had worked for decades. The hospital partnerships, which Dr. Frist had long opposed, also made him chafe. But his attempts to speak to Mr. Scott, and persuade him to adjust his tactics, went nowhere.

Dr. Frist ''was increasingly uncomfortable with the way decisions were being made,'' said one person close to the company. ''And he was increasingly ineffective at having any impact.''

Toward the end of last year, communications with Dr. Frist were essentially cut off -- a critical mistake, because the former HCA executive was a board member and one of the company's largest shareholders.

Then, last March, the company's hospitals and offices in El Paso were raided by Federal agents. Board members, who until then had been content with Columbia's consistent high earnings and growth, turned to Mr. Scott for answers.

According to people with knowledge of the discussions, Mr. Scott handled the concerns by assuring the directors that the Government had nothing on the company, that there were no problems, and that there had been similar investigations in the past that had simply fizzled.

Indeed, Mr. Scott had handled previous Federal investigations with a disdain that is remarkable for the head of a public company. When Federal investigators in Tampa, Fla., asked for him to be interviewed regarding certain accusations during an investigation in 1995, Mr. Scott not only did not agree to the interview, neither he nor the company even replied to the repeated requests.

Beginning last March, articles about Columbia's business practices began to appear in The New York Times. The examination, the result of a yearlong examination of the company, included computer analyses that raised questions about whether the company was overbilling Medicare for services Columbia provided. The articles led to an investigation by the Federal Medicare agency of possible overbilling. The articles also addressed the company's offering of investment opportunities to doctors, about whether its leaner staffing levels affect patient care, and about its often closed-door purchases of not-for-profit hospitals.

But again, when directors questioned Mr. Scott about the issues being raised in the articles, Mr. Scott dismissed them, people familiar with the discussions said.

Board members, with the encouragement of Ms. Moore, began contacting each other by telephone, and discussing whether Mr. Scott's apparent inability to see potential problems might harm the company. Also, a committee of the board, led by one director, T. Michael Long, began to meet to examine the El Paso situation, and over time focused on what Mr. Scott's role should be in the company's future.

By earlier this month, the directors had tentatively decided Mr. Scott should go. But at that point, the directors decided to wait for an event that could precipitate a final effort to force him out.

The event arrived last week, with the raids in seven states. Mr. Scott again dismissed the raids as something that happen in health care. But this time his assurances met with resistance. On Thursday, July 17, Mr. Scott finally learned the news: The board wanted him to go.

Over the next week, plans for how to move him out gracefully were explored, including the merger with Tenet Healthcare. Over several years Columbia had been tentatively exploring such a merger. If such a deal could be negotiated quickly, some people in the company thought, Mr. Scott could be allowed to step down with dignity.

But a merger could not be reached quickly enough. Now, such a deal is said to be on a back burner while the company attempts to handle the Federal investigation.

Columbia directors met on Thursday at the company's headquarters in Nashville. The meeting settled Mr. Scott's resignation. By yesterday, an agreement had been reached to provide him with severance pay of less than $10 million, while allowing him to keep holding the millions of shares he had accumulated.